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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934
For the Quarterly Period Ended September 30, 2017
or
☐☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from to
Commission File Number: 001-13357
Royal Gold, Inc.(Exact Name of Registrant as Specified in Its Charter)
Delaware 84-0835164
(State or Other Jurisdiction of (I.R.S. EmployerIncorporation) Identification No.)
1660 Wynkoop Street, Suite 1000
Denver, Colorado 80202(Address of Principal Executive Offices) (Zip Code)
Registrant’s telephone number, including area code (303) 573-1660
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities ExchangeAct of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive DataFile required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months(or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reportingcompany, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,”and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒ Accelerated filer ☐
Non-accelerated filer ☐ (Do not check if a smaller reporting company) Smaller reporting company ☐
Emerging growth company ☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complyingwith any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒ There were 65,454,278 shares of the Company’s common stock, par value $0.01 per share, outstanding as of October 26, 2017 .
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INDEX PAGE PART I FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets 3 Consolidated Statements of Operations and Comprehensive Income 4 Consolidated Statements of Cash Flows 5 Notes to Consolidated Financial Statements 6 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 14 Item 3. Quantitative and Qualitative Disclosures about Market Risk 24 Item 4. Controls and Procedures 25 PART II OTHER INFORMATION Item 1. Legal Proceedings 25 Item 1A. Risk Factors 25 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 25 Item 3. Defaults Upon Senior Securities 25 Item 4. Mine Safety Disclosure 25 Item 5. Other Information 26 Item 6. Exhibits 26 SIGNATURES 27
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ITEM 1. FINANCIAL STATEMENTS
ROYAL GOLD, INC.Consolidated Balance Sheets
(Unaudited, in thousands except share data)
September 30, 2017 June 30, 2017ASSETS
Cash and equivalents $ 88,395 $ 85,847Royalty receivables 29,079 26,886Income tax receivable 26,023 22,169Stream inventory 7,794 7,883Prepaid expenses and other 4,488 822Total current assets 155,779 143,607
Stream and royalty interests, net (Note 2) 2,852,598 2,892,256Other assets 57,518 58,202Total assets $ 3,065,895 $ 3,094,065
LIABILITIES Accounts payable $ 2,924 $ 3,908Dividends payable 15,708 15,682Income tax payable 11,686 5,651Foreign withholding taxes payable 3,462 3,425Other current liabilities 5,915 5,617Total current liabilities 39,695 34,283
Debt (Note 3) 539,772 586,170Deferred tax liabilities 121,731 121,330Uncertain tax positions 28,120 25,627Other long-term liabilities 6,391 6,391Total liabilities 735,709 773,801
Commitments and contingencies (Note 10) EQUITY
Preferred stock, $.01 par value, 10,000,000 shares authorized; and 0 shares issued — —Common stock, $.01 par value, 200,000,000 shares authorized; and 65,306,271and 65,179,527 shares outstanding, respectively 653 652Additional paid-in capital 2,184,639 2,185,796Accumulated other comprehensive income 1,076 879Accumulated earnings 100,972 88,050Total Royal Gold stockholders’ equity 2,287,340 2,275,377Non-controlling interests 42,846 44,887Total equity 2,330,186 2,320,264Total liabilities and equity $ 3,065,895 $ 3,094,065
The accompanying notes are an integral part of these consolidated financial statements.
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ROYAL GOLD, INC.Consolidated Statements of Operations and Comprehensive Income
(Unaudited, in thousands except share data)
For The Three Months Ended September 30, September 30, 2017 2016Revenue $ 112,476 $ 117,947 Costs and expenses Cost of sales 20,419 22,662General and administrative 6,899 10,507Production taxes 543 497Exploration costs 3,203 3,288Depreciation, depletion and amortization 39,692 40,102
Total costs and expenses 70,756 77,056 Operating income 41,720 40,891 Interest and other income 989 1,557Interest and other expense (8,617) (8,305)Income before income taxes 34,092 34,143 Income tax expense (7,544) (7,188)Net income 26,548 26,955Net loss attributable to non-controlling interests 2,083 2,832Net income attributable to Royal Gold common stockholders $ 28,631 $ 29,787 Net income $ 26,548 $ 26,955Adjustments to comprehensive income, net of tax Unrealized change in market value of available-for-sale securities 197 —
Comprehensive income 26,745 26,955Comprehensive loss attributable to non-controlling interests 2,083 2,832Comprehensive income attributable to Royal Gold stockholders $ 28,828 $ 29,787 Net income per share available to Royal Gold common stockholders: Basic earnings per share $ 0.44 $ 0.46Basic weighted average shares outstanding 65,235,496 65,116,686Diluted earnings per share $ 0.44 $ 0.46Diluted weighted average shares outstanding 65,404,680 65,280,904Cash dividends declared per common share $ 0.24 $ 0.23
The accompanying notes are an integral part of these consolidated financial statements.
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ROYAL GOLD, INC.Consolidated Statements of Cash Flows
(Unaudited, in thousands)
For The Three Months Ended September 30, September 30, 2017 2016Cash flows from operating activities: Net income $ 26,548 $ 26,955Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization 39,692 40,102Amortization of debt discount and issuance costs 3,679 3,351Non-cash employee stock compensation expense 2,373 4,144Deferred tax expense (727) (1,030)Other (223) (153)
Changes in assets and liabilities: Royalty receivables (2,193) (7,048)Stream inventory 89 (3,125)Income tax receivable (3,854) (3,215)Prepaid expenses and other assets (1,654) (1,724)Accounts payable (985) 1,777Income tax payable 6,035 (13,264)Foreign withholding taxes payable 37 1,086Uncertain tax positions 2,493 6,374Other liabilities 299 878
Net cash provided by operating activities $ 71,609 $ 55,108 Cash flows from investing activities: Acquisition of stream and royalty interests (5) (90,083)Other 100 (226)
Net cash provided by (used in) investing activities $ 95 $ (90,309) Cash flows from financing activities: Borrowings from revolving credit facility — 70,000Repayment of revolving credit facility (50,000) —Net payments from issuance of common stock (3,529) (2,038)Common stock dividends (15,682) (15,012)Purchase of additional royalty interest from non-controlling interest — (1,025)Other 55 (315)
Net cash (used in) provided by financing activities $ (69,156) $ 51,610Net increase in cash and equivalents 2,548 16,409Cash and equivalents at beginning of period 85,847 116,633Cash and equivalents at end of period $ 88,395 $ 133,042
The accompanying notes are an integral part of these consolidated financial statements.
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ROYAL GOLD, INC.Notes to Consolidated Financial Statements
(Unaudited)
1. OPERATIONS, SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENTLY ISSUEDAND RECENTLY ADOPTED ACCOUNTING STANDARDS
Royal Gold, Inc. (“Royal Gold”, the “Company”, “we”, “us”, or “our”), together with its subsidiaries, is engaged in the businessof acquiring and managing precious metals streams, royalties and similar interests. We seek to acquire existing stream androyalty interests or to finance projects that are in production or in the development stage in exchange for stream or royaltyinterests. A metal stream is a purchase agreement that provides, in exchange for an upfront deposit payment, the right to purchaseall or a portion of one or more metals produced from a mine at a price determined for the life of the transaction by the purchaseagreement. Royalties are non-operating interests in mining projects that provide the right to revenue or metals produced from theproject after deducting specified costs, if any. Summary of Significant Accounting Policies The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally acceptedaccounting principles (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 ofRegulation S-X under the Securities Exchange Act of 1934, as amended. Accordingly, they do not include all of the informationand footnotes required by U.S. GAAP for annual financial statements. In the opinion of management, all adjustments which areof a normal recurring nature considered necessary for a fair presentation of our interim financial statements have been included inthis Form 10-Q. Operating results for the three months ended September 30, 2017, are not necessarily indicative of the resultsthat may be expected for the fiscal year ending June 30, 2018. These interim unaudited financial statements should be read inconjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2017 filed with the Securitiesand Exchange Commission on August 10, 2017 (“Fiscal 2017 10-K”). Certain amounts in the prior period financial statements have been reclassified for comparative purposes to conform with thepresentation in the current period financial statements. Reclassified amounts were not material to the financial statements. Recently Issued and Adopted Accounting Standards Recently Issued In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) guidance forthe recognition of revenue from contracts with customers. This ASU superseded virtually all of the existing revenue recognitionguidance under U.S. GAAP. The core principle of the five–step model is that an entity will recognize revenue when it transferscontrol of goods or services to customers at an amount that reflects the consideration to which it expects to be entitled inexchange for those goods or services. Entities can choose to apply the standard using either the full retrospective approach or amodified retrospective approach, and is effective for the Company’s fiscal year beginning July 1, 2018. Early adoption ispermitted. We plan to implement the new ASU revenue recognition guidance as of July 1, 2018, using the modified retrospective methodwith the cumulative effect, if any, of initial adoption to be recognized in Accumulated earnings at the date of initialapplication. We are in the initial stages of our evaluation of the impact of the new standard on our accounting policies, processes,and financial reporting. Based on the evaluation performed to-date, we expect to identify similar performance obligations ascompared with deliverables and separate units of account previously identified. We will continue to assess the impact of adoptingthis ASU throughout the remainder of fiscal year 2018. Recently Adopted In March 2016, the FASB issued ASU guidance related to stock-based compensation. The new guidance simplifies theaccounting for stock-based compensation transactions, including income tax consequences, statement of cash flows presentation,estimating forfeitures when calculating compensation expense, and classification of awards as either equity or liabilities.
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The new standard requires all excess tax benefits and tax deficiencies to be recognized as income tax benefit (expense) in theincome statement. The new guidance also requires presentation of excess tax benefits as an operating activity on the statement ofcash flows rather than a financing activity and requires presentation of cash paid to a tax authority when shares are withheld tosatisfy the employer’s statutory income tax withholding obligation as a financing activity. The new guidance also provides for anelection to account for forfeitures of stock-based compensation. The Company adopted the ASU guidance effective July 1, 2017. With respect to the forfeiture election, the Company willcontinue its current practice of estimating forfeitures when calculating compensation expense. The adoption of this standard didnot have a material impact on the Company’s consolidated financial statements or related disclosures. 2. STREAM AND ROYALTY INTERESTS, NET The following tables summarize the Company’s stream and royalty interests, net as of September 30, 2017 and June 30, 2017.
As of September 30, 2017 (Amounts in thousands): Cost Accumulated
Depletion NetProduction stage stream interests: Mount Milligan $ 790,635 $ (123,427) $ 667,208Pueblo Viejo 610,404 (79,801) 530,603Andacollo 388,182 (43,722) 344,460Wassa and Prestea 146,475 (28,695) 117,780Total production stage stream interests 1,935,696 (275,645) 1,660,051
Production stage royalty interests: Voisey's Bay 205,724 (85,671) 120,053Peñasquito 99,172 (35,882) 63,290Holt 34,612 (20,103) 14,509Cortez 20,878 (10,879) 9,999Other 483,643 (343,722) 139,921Total production stage royalty interests 844,029 (496,257) 347,772
Total production stage stream and royalty interests 2,779,725 (771,902) 2,007,823
Development stage stream interests: Rainy River 175,727 — 175,727Other 12,031 — 12,031Total development stage stream interests 187,758 — 187,758
Development stage royalty interests: Pascua-Lama 380,657 — 380,657Cortez 59,803 — 59,803Other 63,811 — 63,811Total development stage royalty interests 504,271 — 504,271
Total development stage stream and royalty interests 692,029 — 692,029Total exploration stage royalty interests 152,746 — 152,746Total stream and royalty interests $ 3,624,500 $ (771,902) $ 2,852,598
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As of June 30, 2017 (Amounts in thousands): Cost Accumulated
Depletion NetProduction stage stream interests: Mount Milligan $ 790,635 $ (114,327) $ 676,308Pueblo Viejo 610,404 (67,149) 543,255Andacollo 388,182 (39,404) 348,778Wassa and Prestea 146,475 (22,715) 123,760Total production stage stream interests 1,935,696 (243,595) 1,692,101
Production stage royalty interests: Voisey's Bay 205,724 (85,671) 120,053Peñasquito 99,172 (34,713) 64,459Holt 34,612 (19,669) 14,943Cortez 20,873 (10,633) 10,240Other 483,643 (337,958) 145,685Total production stage royalty interests 844,024 (488,644) 355,380
Total production stage stream and royalty interests 2,779,720 (732,239) 2,047,481Development stage stream interests: Rainy River 175,727 — 175,727Other 12,031 — 12,031Total development stage stream interests 187,758 — 187,758
Development stage royalty interests: Pascua-Lama 380,657 — 380,657Cortez 59,803 — 59,803Other 63,811 — 63,811Total development stage royalty interests 504,271 — 504,271
Total development stage stream and royalty interests 692,029 — 692,029Total exploration stage royalty interests 152,746 — 152,746Total stream and royalty interests $ 3,624,495 $ (732,239) $ 2,892,256
3. DEBT The Company’s non-current debt as of September 30, 2017 and June 30, 2017 consists of the following:
As of September 30, 2017 As of June 30, 2017
Principal Unamortized
Discount
DebtIssuance
Costs Total Principal Unamortized
Discount
DebtIssuance
Costs Total (Amounts in thousands) (Amounts in thousands)Convertible notes due 2019 $ 370,000 $ (22,206) $ (2,318) $ 345,476 $ 370,000 $ (25,251) $ (2,646) $ 342,103Revolving credit facility 200,000 — (5,704) 194,296 250,000 — (5,933) 244,067Total debt $ 570,000 $ (22,206) $ (8,022) $ 539,772 $ 620,000 $ (25,251) $ (8,579) $ 586,170 Convertible Senior Notes Due 2019 In June 2012, the Company completed an offering of $370 million aggregate principal amount of 2.875% convertible senior notesdue 2019 (“2019 Notes”). The 2019 Notes bear interest at the rate of 2.875% per annum, and the Company is required to makesemi-annual interest payments on the outstanding principal balance of the 2019 Notes on June 15 and December 15 of each year,beginning December 15, 2012. The 2019 Notes mature on June 15, 2019. Interest expense recognized on the 2019 Notes for thethree months ended September 30, 2017, was $6.0 million compared to $5.8 million for the three months ended September 30,2016, and included the contractual coupon interest, the accretion of the debt discount and amortization of the debt issuance costs. Revolving credit facility The Company maintains a $1 billion revolving credit facility. As of September 30, 2017, the Company had $200 millionoutstanding and $800 million available under the revolving credit facility with an interest rate on borrowings of LIBOR plus1.75% for an all-in rate of 3.07%. During the three months ended September 30, 2017, the Company repaid $50.0
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million of the outstanding borrowings under the revolving credit facility. Royal Gold may repay borrowings under the revolvingcredit facility at any time without premium or penalty. Interest expense recognized on the revolving credit facility for the threemonths ended September 30, 2017, was $1.8 million and $1.9 million for the three months ended September 30, 2016, andincluded interest on the outstanding borrowings and the amortization of the debt issuance costs. As discussed in Note 5 to the notes to consolidated financial statements in the Company’s Fiscal 2017 10-K, the Company hasfinancial covenants associated with its revolving credit facility. As of September 30, 2017, the Company was in compliance witheach financial covenant. 4. REVENUE Revenue is comprised of the following:
Three Months Ended September 30, September 30, 2017 2016 (Amounts in thousands)Stream interests $ 78,762 $ 85,504Royalty interests 33,714 32,443Total revenue $ 112,476 $ 117,947
5. STOCK-BASED COMPENSATION The Company recognized stock-based compensation expense as follows:
Three Months Ended September 30, September 30, 2017 2016 (Amounts in thousands)Stock options $ 91 $ 108Stock appreciation rights 488 468Restricted stock 1,426 1,374Performance stock 368 2,194Total stock-based compensation expense $ 2,373 $ 4,144 Stock-based compensation expense is included within General and administrative expense in the consolidated statements ofoperations and comprehensive income. During the three months ended September 30, 2017 and 2016, the Company granted the following stock-based compensationawards:
Three Months Ended September 30, September 30, 2017 2016 (Number of shares)Stock options 6,858 7,200Stock appreciation rights 71,262 63,340Restricted stock 50,380 44,890Performance stock 34,010 29,830Total equity awards granted 162,510 145,260
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As of September 30, 2017, unrecognized compensation expense (expressed in thousands below) and weighted-average vestingperiod for each of our stock-based compensation awards were as follows:
Unrecognized Weighted- compensation average vesting expense period (years)Stock options $ 473 2.0Stock appreciation rights 3,627 2.3Restricted stock 7,684 3.4Performance stock 2,790 2.1
6. EARNINGS PER SHARE (“EPS”) Basic earnings per common share were computed using the weighted average number of shares of common stock outstandingduring the period, considering the effect of participating securities. Unvested stock-based compensation awards that contain non-forfeitable rights to dividends or dividend equivalents are considered participating securities and are included in the computationof earnings per share pursuant to the two-class method. The Company’s unvested restricted stock awards contain non-forfeitabledividend rights and participate equally with common stock with respect to dividends issued or declared. The Company’sunexercised stock options, unexercised SSARs and unvested performance stock do not contain rights to dividends. Under thetwo-class method, the earnings used to determine basic earnings per common share are reduced by an amount allocated toparticipating securities. Use of the two-class method has an immaterial impact on the calculation of basic and diluted earnings percommon share. The following tables summarize the effects of dilutive securities on diluted EPS for the period:
Three Months Ended September 30, September 30, 2017 2016 (in thousands, except per share data)Net income available to Royal Gold common stockholders $ 28,631 $ 29,787Weighted-average shares for basic EPS 65,235,496 65,116,686Effect of other dilutive securities 169,184 164,218Weighted-average shares for diluted EPS 65,404,680 65,280,904Basic earnings per share $ 0.44 $ 0.46Diluted earnings per share $ 0.44 $ 0.46 The calculation of weighted average shares includes all of our outstanding common stock. The Company intends to settle theprincipal amount of the 2019 Notes in cash. As a result, there will be no impact to diluted earnings per share unless the shareprice of the Company’s common stock exceeds the conversion price of $102.91. 7. INCOME TAXES
Three Months Ended September 30, September 30, 2017 2016 (Amounts in thousands, except rate)Income tax expense $ 7,544 $ 7,188Effective tax rate 22.1% 21.1% The increase in the effective tax rate for the three months ended September 30, 2017 is primarily attributable to the re-measurement of Canadian dollar deferred tax liabilities to US dollars due to changes in the Canadian dollar to US dollar exchangerate.
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8. SEGMENT INFORMATION The Company manages its business under two reportable segments, consisting of the acquisition and management of streaminterests and the acquisition and management of royalty interests. Royal Gold’s long-lived assets (stream and royalty interests,net) are geographically distributed as shown in the following table:
As of September 30, 2017 As of June 30, 2017
Streaminterest
Royaltyinterest
Total stream and royalty interests, net
Streaminterest
Royalty interest
Total stream and royalty interests, net
Canada $ 842,935 $ 220,160 $1,063,095 $ 852,035 $ 221,618 $1,073,653Dominican Republic 530,603 — 530,603 543,256 — 543,256Chile 344,460 453,369 797,829 348,778 453,369 802,147Africa 117,780 553 118,333 123,760 572 124,332Mexico — 103,039 103,039 — 105,889 105,889United States — 167,430 167,430 — 168,378 168,378Australia — 36,563 36,563 — 37,409 37,409Other 12,031 23,675 35,706 12,030 25,162 37,192
Total $1,847,809 $1,004,789 $2,852,598 $1,879,859 $ 1,012,397 $2,892,256 The Company’s revenue, cost of sales and net revenue by reportable segment for the three months ended September 30, 2017 and2016, is geographically distributed as shown in the following table:
Three Months Ended September 30, 2017 Three Months Ended September 30, 2016 Revenue Cost of sales Net revenue Revenue Cost of sales Net revenueStreams: Canada $ 31,952 $ 9,223 $ 22,729 $ 38,386 $ 12,578 $ 25,808Dominican Republic 25,403 7,588 17,815 20,950 5,896 15,054Chile 12,337 1,812 10,525 20,169 2,998 17,171Africa 9,070 1,796 7,274 5,999 1,190 4,809
Total streams $ 78,762 $ 20,419 $ 58,343 $ 85,504 $ 22,662 $ 62,842 Royalties: Mexico $ 10,897 $ — $ 10,897 $ 9,596 $ — $ 9,596United States 10,429 — 10,429 9,706 — 9,706Canada 6,092 — 6,092 6,188 — 6,188Australia 3,320 — 3,320 3,462 — 3,462Africa 462 — 462 824 — 824Chile — — — 489 — 489Other 2,514 — 2,514 2,178 — 2,178
Total royalties $ 33,714 $ — $ 33,714 $ 32,443 $ — $ 32,443Total streams and royalties $ 112,476 $ 20,419 $ 92,057 $ 117,947 $ 22,662 $ 95,285
9. FAIR VALUE MEASUREMENTS FASB Accounting Standards Codification (ASC) 820, Fair Value Measurements and Disclosures (“ASC 820”) establishes a fairvalue hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highestpriority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowestpriority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under ASC 820 are describedbelow:
Level 1: Quoted prices for identical instruments in active markets;
Level 2: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments inmarkets that are not active; and model-derived valuations in which all significant inputs and significant value drivers areobservable in active markets; and
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Level 3: Prices or valuation techniques requiring inputs that are both significant to the fair value measurement andunobservable (supported by little or no market activity).
The following table sets forth the Company’s financial assets measured at fair value on a recurring basis (at least annually) bylevel within the fair value hierarchy.
As of September 30, 2017 Carrying Fair Value Amount Total Level 1 Level 2 Level 3Assets (In thousands): Marketable equity securities $ 4,998 $ 4,998 $ 4,998 $ — $ —
Total assets $ 4,998 $ 4,998 $ — $ —Liabilities (In thousands): Debt $ 424,794 $ 409,538 $ 409,538 $ — $ —
Total liabilities $ 409,538 $ 409,538 $ — $ —
(1) Available-for-sale securities of $3.9 million included within Other assets and trading securities of $1.1 million includedwithin Prepaid expenses and other on the Company’s consolidated balance sheets.
(2) Included in the carrying amount is the equity component of our 2019 Notes in the amount of $77 million, which is includedwithin Additional paid-in capital on the Company’s consolidated balance sheets.
The Company’s marketable equity securities classified within Level 1 of the fair value hierarchy are valued using quoted marketprices in active markets. The fair value of the Level 1 marketable equity securities is calculated as the quoted market price of themarketable equity security multiplied by the quantity of shares held by the Company. The warrants that were part of the termloan funded to a subsidiary of Golden Star Resources Ltd. (“Golden Star”) in July 2015 were exercised during the quarter-endedSeptember 30, 2017. The warrants had been classified within Level 2 of the fair value hierarchy as of June 30, 2017. The fairvalue of the Golden Star common shares received by the Company upon exercise of the warrants are classified within Level 1 ofthe fair value hierarchy as of September 30, 2017. The Company sold all of the common shares of Golden Star received uponexercise of the warrants in October 2017. The Company’s debt classified within Level 1 of the fair value hierarchy is valuedusing quoted prices in an active market. The carrying value of the Company’s revolving credit facility (Note 3) approximates fairvalue as of September 30, 2017. As of September 30, 2017, the Company also had assets that, under certain conditions, are subject to measurement at fair value ona non-recurring basis like those associated with stream and royalty interests, intangible assets and other long-lived assets. Forthese assets, measurement at fair value in periods subsequent to their initial recognition is applicable if any of these assets aredetermined to be impaired. If recognition of these assets at their fair value becomes necessary, such measurements will bedetermined utilizing Level 3 inputs. 10. COMMITMENTS AND CONTINGENCIES Ilovica Gold Stream Acquisition As of September 30, 2017, the Company’s conditional funding schedule for $163.75 million related to its Ilovica gold streamacquisition made in October 2014 remains subject to certain conditions. Voisey’s Bay The Company indirectly owns a royalty on the Voisey’s Bay mine in Newfoundland and Labrador owned by Vale Newfoundland& Labrador Limited (“VNL”). The royalty is directly owned by the Labrador Nickel Royalty Limited Partnership (“LNRLP”), inwhich the Company’s wholly-owned indirect subsidiary, Voisey’s Bay Holding Corporation, is the general partner and 90%owner. The remaining 10% interest in LNRLP is owned by Altius Royalty Corporation, a company unrelated to Royal Gold. On October 6, 2017, LNRLP filed a Fresh as Amended Statement of Claim, amending the original October 16, 2009 Statement ofClaim and amendments thereto made in December 2014, in the Supreme Court of Newfoundland and Labrador Trial Divisionagainst Vale Inco Limited, now known as Vale Canada Limited, and its wholly-owned
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subsidiaries, Vale Inco Atlantic Sales Limited and VNL, related to calculation of the NSR on the sale of concentrates, includingnickel concentrates, from the Voisey’s Bay mine. LNRLP asserts that the defendants have incorrectly calculated the NSR sinceproduction at Voisey’s Bay began in late 2005, and since defendants began processing Voisey’s Bay concentrates at the newLong Harbour processing facility, and that the defendants have breached their contractual duties of good faith in severalways. LNRLP requests an order in respect of the correct calculation of future payments, and unspecified damages for non-payment and underpayment of past royalties to the date of the claim, together with additional damages until the date of trial,interest, costs and other damages. The litigation is in the discovery phase, and trial is expected to commence in the second half ofcalendar 2018.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS
General This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provideinformation to assist you in better understanding and evaluating our financial condition and results of operations. RoyalGold, Inc. (“Royal Gold”, the “Company”, “we”, “us”, or “our”), recommends that you read this MD&A in conjunction with ourconsolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q, as well as our Annual Report onForm 10-K for the fiscal year ended June 30, 2017 filed with the Securities and Exchange Commission (the “SEC”) on August 10,2017. This MD&A contains forward-looking information. You should review our important note about forward-looking statementsfollowing this MD&A. We refer to “GSR,” “NSR,” “NVR,” “metal stream (or “stream”)” and other types of royalty or similar interests throughout thisMD&A. These terms are defined in our Fiscal 2017 10-K. Statement Regarding Third Party Information Certain information provided in this report, including the Operator’s Production Estimates by Stream and Royalty Interest forCalendar 2017 and Property Developments, has been provided to us by the operators of properties where we own interests or ispublicly available information filed by these operators with applicable securities regulatory bodies, including the SEC. RoyalGold has not verified, and is not in a position to verify, and expressly disclaims any responsibility for, the accuracy, completenessor fairness of such third-party information and refers the reader to the public reports filed by the operators for informationregarding those properties. Overview Royal Gold, together with its subsidiaries, is engaged in the business of acquiring and managing precious metal streams, royalties,and similar interests. We seek to acquire existing stream and royalty interests or to finance projects that are in production or inthe development stage in exchange for stream or royalty interests. We manage our business under two segments: Acquisition and Management of Stream Interests — A metal stream is a purchase agreement that provides, in exchange for anupfront deposit payment, the right to purchase all or a portion of one or more metals produced from a mine, at a price determinedfor the life of the transaction by the purchase agreement. As of September 30, 2017, we owned stream interests on four producingproperties and two development stage properties. Stream interests accounted for approximately 70% and 72% of our totalrevenue for the three months ended September 30, 2017 and 2016, respectively. We expect stream interests to continuerepresenting a significant proportion of our total revenue. Acquisition and Management of Royalty Interests — Royalties are non-operating interests in mining projects that provide the rightto revenue or metals produced from the project after deducting specified costs, if any. As of September 30, 2017, we ownedroyalty interests on 35 producing properties, 20 development stage properties and 134 exploration stage properties, of which weconsider 51 to be evaluation stage projects. We use “evaluation stage” to describe exploration stage properties that containmineralized material and on which operators are engaged in the search for reserves. Royalties accounted for approximately 30%and 28% of our total revenue for the three months ended September 30, 2017 and 2016, respectively. We do not conduct mining operations on the properties in which we hold stream and royalty interests, and except for our interestin the Peak Gold, LLC joint venture (“Peak Gold JV”), we generally are not required to contribute to capital costs, explorationcosts, environmental costs or other operating costs on those properties. In the ordinary course of business, we engage in a continual review of opportunities to acquire existing stream and royaltyinterests, to establish new streams on operating mines, to create new stream and royalty interests through the financing of minedevelopment or exploration, or to acquire companies that hold stream and royalty interests. We currently, and
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generally at any time, have acquisition opportunities in various stages of active review, including, for example, our engagement ofconsultants and advisors to analyze particular opportunities, analysis of technical, financial and other confidential information,submission of indications of interest and term sheets, participation in preliminary discussions and negotiations and involvement asa bidder in competitive processes. Our financial results are primarily tied to the price of gold and, to a lesser extent, the price of silver and copper, together with theamounts of production from our producing stage stream and royalty interests. The price of gold, silver, copper and other metalshas fluctuated widely in recent years. The marketability and the price of metals are influenced by numerous factors beyond thecontrol of the Company and significant declines in the price of gold, silver or copper could have a material and adverse effect onthe Company’s results of operations and financial condition. For the three months ended September 30, 2017 and 2016, gold, silver and copper price averages and percentage of revenue bymetal were as follows:
Three Months Ended September 30, 2017 September 30, 2016
Metal Average
Price Percentage of
Revenue Average
Price Percentage of Revenue
Gold ($/ounce) $ 1,278 77% $ 1,335 88%Silver ($/ounce) $ 16.84 10% $ 19.61 7%Copper ($/pound) $ 2.88 10% $ 2.16 2%Other N/A 3% N/A 3% Principal Stream and Royalty Interests The Company considers both historical and future potential revenues in determining which stream and royalty interests in ourportfolio are principal to our business. Estimated future potential revenues from both producing and development properties arebased on a number of factors, including reserves subject to our stream and royalty interests, production estimates, feasibilitystudies, metal price assumptions, mine life, legal status and other factors and assumptions, any of which could change and couldcause the Company to conclude that one or more of such stream and royalty interests are no longer principal to ourbusiness. Currently, our principal producing and development stream and royalty interests are listed alphabetically in thefollowing tables. Please refer to our Fiscal 2017 10-K for further discussion of our principal producing and development stream and royaltyinterests.
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Principal Producing Properties
Stream or royalty interestsMine Location Operator (Gold unless otherwise stated)Andacollo Region IV, Chile Compañía Minera Teck Carmen de
Andacollo (“Teck”) Gold stream - 100% of gold produced
(until 900,000 ounces delivered; 50%thereafter)
Cortez Nevada, USA Barrick Gold Corporation("Barrick")
GSR1: 0.40% to 5.0% sliding-scale GSR
GSR2: 0.40% to 5.0% sliding-scale GSR
GSR3: 0.71% GSR NVR1: 4.91% NVR; 4.52% NVR
(Crossroads)Mount Milligan British Columbia, Canada Centerra Gold Inc. ("Centerra") Gold stream - 35.00% of payable gold Copper stream - 18.75% of payable
copperPeñasquito Zacatecas, Mexico Goldcorp Inc. (“Goldcorp”) 2.0% NSR (gold, silver, lead, zinc)Pueblo Viejo Sanchez Ramirez,
Dominican Republic Barrick (60%) Gold stream - 7.5% of gold produced
(until 990,000 ounces delivered; 3.75%thereafter)
Silver stream - 75% of silver produced(until 50.0 million ounces delivered;37.5% thereafter)
Wassa and Prestea Western Region of Ghana Golden Star Resources Ltd.(“Golden Star”)
Gold stream - 9.25% of gold produced
(1) Gold stream percentage increases to 10.5% upon the earlier of (i) December 31, 2017 or (ii) the date at which Wassa and Presteaunderground projects achieve commercial production.
Principal Development Stage Properties
Stream or royalty interestsMine Location Operator (Gold unless otherwise stated)Rainy River Ontario, Canada New Gold, Inc. (“New Gold”) Gold stream - 6.5% of gold produced
(until 230,000 ounces delivered; 3.25%thereafter)
Silver stream - 60% of silver produced(until 3.1 million ounces delivered;30% thereafter)
Pascua-Lama Region III, Chile Barrick 0.78% to 5.45% sliding-scale NSR 1.09% fixed rate royalty (copper)
(1) New Gold announced commercial production at Rainy River in October 2017. Upon delivery of the first metal from Rainy River aspart of our stream agreement, the Company will reclassify the Rainy River stream interest to production stage.
Operators’ Production Estimates by Stream and Royalty Interest for Calendar 2017 We received annual production estimates from many of the operators of our producing mines during the first calendar quarter of2017. The following table shows such production estimates for our principal producing properties for calendar 2017 as well asthe actual production reported to us by the various operators through September 30, 2017. The estimates and production reportsare prepared by the operators of the mining properties. We do not participate in the preparation or calculation of the operators’estimates or production reports and have not independently assessed or verified, and disclaim all responsibility for, the accuracyof such information. Please refer to “Property Developments” below within this MD&A for further discussion on our principalproducing and development stage properties.
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Operators’ Estimated and Actual Production by Stream and Royalty Interest for Calendar 2017Principal Producing Properties
Calendar 2017 Operator’s Production Estimate Calendar 2017 Operator’s Production Estimate Actual Gold Silver Base Metals Gold Silver Base MetalsStream/Royalty (oz.) (oz.) (lbs.) (oz.) (oz.) (lbs.)Stream:
Andacollo 61,600 40,500
Mount Milligan 235,000 - 255,000 55 - 65million 164,000
41.3million
Pueblo Viejo 635,000 - 650,000 Not
provided 468,000 Not
provided Wassa and Prestea 255,000 - 280,000 195,800
Royalty: Cortez GSR1 102,200 57,200 Cortez GSR2 1,600 600 Cortez GSR3 103,800 57,800 Cortez NVR1 63,900 29,900
Peñasquito 410,000 Not
provided 393,000 16.0
million
Lead 125
million 96.8
million
Zinc 325
million 263.2
million
(1) Production estimates received from our operators are for calendar 2017. Please refer to our cautionary statement regarding third partyinformation at the beginning of this MD&A. There can be no assurance that production estimates received from our operators will beachieved. Please also refer to our cautionary language regarding forward-looking statements following this MD&A, as well as the RiskFactors identified in Part I, Item 1A, of our Fiscal 2017 10-K for information regarding factors that could affect actual results.
(2) Actual production figures shown are from our operators and cover the period January 1, 2017 through September 30, 2017, unless
otherwise noted. (3) The estimated and actual production figures shown for Andacollo are contained gold in concentrate. (4) The estimated and actual production figures shown for Mount Milligan are payable gold and copper in concentrate. (5) The estimated and actual production figures shown for Pueblo Viejo are payable gold in doré and represent Barrick’s 60% interest in
Pueblo Viejo. The operator did not provide estimated or actual silver production. (6) The estimated and actual gold production shown for Peñasquito are payable gold in concentrate. The operator did not provide
estimated silver production. Property Developments The following property development information is provided by the operators of the property, either to Royal Gold or in variousdocuments made publicly available. Stream Interests Andacollo Gold stream deliveries from Andacollo were approximately 13,000 ounces of gold for the three months ended September 30,2017, compared to approximately 15,300 ounces of gold for the three months ended September 30, 2016. Teck indicated their expectation that grades will continue to gradually decline in calendar 2017 and future years, which theyexpect to be offset largely by planned throughput improvements in the mill. Teck expects production in calendar 2017 to besimilar to calendar 2016. The current life of mine for Andacollo is expected to continue until 2034. Additional permitting or amendments will be requiredto execute the life of mine plan.
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Mount Milligan Gold stream deliveries from Mount Milligan were approximately 18,800 ounces of gold for the three months ended September30, 2017, compared to approximately 29,900 ounces of gold for the three months ended September 30, 2016. The decreaseduring the current quarter is primarily attributable to the reduced stream rate of 35% versus 52.25% in the prior year quarter. Centerra announced a decrease from their previously reported gold production guidance of 260,000 to 290,000 ounces to 235,000to 255,000 ounces. Centerra indicated that the revised forecast is due to lower than expected mill throughput as a result of lowerequipment availabilities which led to lower gold production. Copper stream deliveries from Mount Milligan were approximately 1,170 tonnes during the three months ended September 30,2017. Copper stream deliveries began during the June 2017 quarter. Centerra continues to evaluate the mine and mill to improve metal recovery and mill throughput. Centerra also worked withexternal consultants to develop and prioritize several process optimization opportunities related to flotation performance. Optimization studies and continuous improvement initiatives to improve mill circuit efficiencies are ongoing. Comminutionstudies to understand equipment capabilities and restrictions were conducted around the secondary crushing plant and millgrinding circuits. Pueblo Viejo Gold stream deliveries from Pueblo Viejo were approximately 10,500 ounces of gold for the three months ended September 30,2017, compared to approximately 13,700 ounces for the three months ended September 30, 2016. Barrick announced a narrowingof their calendar 2017 gold production guidance from between 625,000 to 650,000 ounces to between 635,000 to 650,000ounces. Silver stream deliveries were approximately 470,000 ounces of silver for the three months ended September 30, 2017, comparedto approximately 543,300 ounces of silver for the three months ended September 30, 2016. Rainy River On October 19, 2017, New Gold announced that the Rainy River mine achieved commercial production, approximately twoweeks ahead of schedule. In its first 30 days of operation, New Gold reported that Rainy River has successfully processedapproximately 457,000 tonnes of ore and that both grade and recoveries were consistent with their commissioning plan. For theperiod October 1 to October 24, 2017, Rainy River processed an average of 18,500 tonnes per day, which is approximately 88%of nameplate capacity. On September 28, 2017, New Gold also announced the approval of the Schedule 2 Amendment of the Metal Mining EffluentRegulations required to close two small creeks to complete construction of the main tailings storage facility. RGLD Gold AG (“RGLD Gold”) has a streaming interest on 6.5% of the gold and 60% of the silver from Rainy River. TheCompany expects to receive monthly gold and silver deliveries from Rainy River beginning in the December 2017 quarter. Atcalendar year-end 2016, New Gold reported reserves of approximately 3.9 million ounces of gold and 10 million ounces of silverat Rainy River. Wassa and Prestea Gold stream deliveries from Wassa and Prestea were approximately 7,400 ounces of gold for the three months ended September30, 2017, compared to approximately 4,500 ounces for the three months ended September 30, 2016. On September 29, 2017, Golden Star announced stoping at Prestea underground commenced and expects to achieve commercialproduction at Prestea underground during the December 2017 quarter. Exploration drilling is underway at Prestea underground,with the objective of increasing the annual production rate and extending the mine life. Gold production from the Wassaunderground operation continues to ramp-up, as previously reported by Golden Star. Our gold stream percentage increases to10.5% upon the earlier of (i) December 31, 2017 or (ii) the date at which Wassa and Prestea underground projects achievecommercial production.
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On August 1, 2017, Golden Star confirmed its calendar 2017 gold production guidance of between 255,000 and 280,000 ounces. Royalty Interests Cortez Production attributable to our royalty interest at Cortez increased approximately 37% over the prior year quarter. Waste strippingat Crossroads, which is subject to our NVR1 (Crossroads) royalty interest, restarted in October 2016 and is currently ongoing. Production from Crossroads is expected to begin in calendar 2018. Peñasquito Gold, silver, lead and zinc production attributable to our royalty interest at Peñasquito increased approximately 34%, 14%, 10%and 27%, respectively during the three months ended September 30, 2017, when compared to the three months ended September30, 2016. Increased production was attributable to higher grades and recoveries for each metal. Goldcorp expects mine grade to decline in the second half of calendar 2017, consistent with their earlier expectations. Startinglate in the December 2017 quarter and through calendar 2018, Goldcorp expects to feed the mill a higher proportion of lowergrade ore and stockpiled material. The feed will then revert back to higher grade ore in calendar 2019 when the Phase 6 strippingprogram exposes higher grade ore in the Peñasco pit. Goldcorp reported that proven and probable gold mineral reserves as of June 30, 2017 totaled 9.0 million ounces, compared to10.0 million ounces as of June 30, 2016. Mine depletion accounted for 0.7 million ounces, while higher input costs and updatedmetallurgical recoveries lead to a change in cut-off grade resulting in the reclassification of approximately 0.4 million ounces intothe measured and indicated mineral resource category. On September 25, 2017, Goldcorp reported that the Pyrite Leach Project (“PLP”) was 40% complete and is expected tocommence commissioning in the December 2018 quarter, three months ahead of schedule. Goldcorp expects the PLP to addproduction of approximately one million ounces of gold and 44 million ounces of silver over the current life of the mine. Results of Operations Quarter Ended September 30, 2017, Compared to Quarter Ended September 30, 2016 For the quarter ended September 30, 2017, we recorded net income attributable to Royal Gold stockholders of $28.6 million, or$0.44 per basic and diluted share, as compared to net income attributable to Royal Gold stockholders of $29.8 million, or $0.46per basic and diluted share, for the quarter ended September 30, 2016. The decrease in our earnings per share was primarilyattributable to a decrease in revenue during the current period, as discussed below. The decrease in revenue during the currentperiod was partially offset by a decrease in general and administrative expenses, which is also discussed below. For the quarter ended September 30, 2017, we recognized total revenue of $112.5 million, which is comprised of stream revenueof $78.8 million and royalty revenue of $33.7 million at an average gold price of $1,278 per ounce, an average silver price of$16.84 per ounce and an average copper price of $2.88 per pound. This is compared to total revenue of $117.9 million for thethree months ended September 30, 2016, which was comprised of stream revenue of $85.5 million and royalty revenue of $32.4million, at an average gold price of $1,335 per ounce, an average silver price of $19.61 per ounce and an average copper price of$2.16 per pound for the quarter ended September 30, 2016. Revenue and the corresponding production attributable to our streamand royalty interests for the quarter ended September 30, 2017 compared to the quarter ended September 30, 2016 are as follows:
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Revenue and Reported Production Subject to Our Stream and Royalty InterestsQuarter Ended September 30, 2017 and 2016
(In thousands, except reported production ozs. and lbs.)
Three Months Ended Three Months Ended September 30, 2017 September 30, 2016 Reported ReportedStream/Royalty Metal(s) Revenue Production Revenue Production Stream : Mount Milligan $ 31,952 $ 38,386 Gold 18,600 oz. 28,900 oz. Copper 2.6 Mlbs. N/A Pueblo Viejo $ 25,403 $ 20,950 Gold 12,900 oz. 11,000 oz. Silver 536,600 oz. 323,300 oz.Andacollo Gold $ 12,337 9,700 oz. $ 20,169 15,200 oz.Wassa and Prestea Gold $ 9,070 7,100 oz. $ 5,999 4,500 oz.Total stream revenue $ 78,762 $ 85,504
Royalty : Peñasquito $ 7,796 $ 5,821
Gold 134,000 oz. 100,100 oz. Silver 5.9 Moz. 5.2 Moz. Lead 36.2 Mlbs. 33.0 Mlbs. Zinc 92.4 Mlbs. 73.0 Mlbs.Cortez Gold $ 2,988 29,900 oz. $ 2,040 21,800 oz.Other Various $ 22,930 N/A $ 24,582 N/A Total royalty revenue $ 33,714 $ 32,443
Total revenue $ 112,476 $ 117,947
(1) Reported production relates to the amount of metal sales, subject to our stream and royalty interests, for the three months endedSeptember 30, 2017 and 2016, and may differ from the operators’ public reporting.
(2) Refer to “Property Developments” above for further discussion on our principal stream and royalty interests. (3) Individually, no stream or royalty included within the “Other” category contributed greater than 5% of our total revenue for either
period. The decrease in our total revenue for the three months ended September 30, 2017, compared with the three months endedSeptember 30, 2016, resulted primarily from a decrease in our stream revenue and a decrease in the average gold and silverprices. The decrease in our stream revenue was primarily attributable to decreased gold production at Mount Milligan andAndacollo, partially offset by a production increase at Wassa and Prestea and new copper deliveries from MountMilligan. Copper deliveries from Mount Milligan began during our June 2017 quarter. Gold and silver ounces and copperpounds
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purchased and sold during the three months ended September 30, 2017 and 2016, and gold and silver ounces in inventory as ofSeptember 30, 2017, and June 30, 2017, for our streaming interests were as follows:
Three Months Ended Three Months Ended As of As of September 30, 2017 September 30, 2016 September 30, 2017 June 30, 2017Gold Stream Purchases (oz.) Sales (oz.) Purchases (oz.) Sales (oz.) Inventory (oz.) Inventory (oz.)Mount Milligan 18,700 18,600 29,900 28,900 200 100Pueblo Viejo 10,500 12,900 13,700 11,000 10,500 12,900Andacollo 13,000 9,600 15,300 15,200 3,500 100Wassa and Prestea 7,400 7,100 4,500 4,500 1,200 1,000Total 49,600 48,200 63,400 59,600 15,400 14,100 Three Months Ended Three Months Ended As of As of September 30, 2017 September 30, 2016 September 30, 2017 June 30, 2017Silver Stream Purchases (Moz.) Sales (Moz.) Purchases (oz.) Sales (oz.) Inventory (oz.) Inventory (oz.)Pueblo Viejo 470,000 536,600 543,300 323,300 470,200 536,800 Three Months Ended Three Months Ended As of As of September 30, 2017 September 30, 2016 September 30, 2017 June 30, 2017Copper Stream Purchases (tonnes) Sales (tonnes) Purchases (tonnes) Sales (tonnes) Inventory (tonnes) Inventory (tonnes)Mount Milligan 1,169 1,169 N/A N/A — — Our royalty revenue increased during the quarter ended September 30, 2017, compared with the quarter ended September 30,2016, primarily due to an increase in gold production at Peñasquito. Please refer to “Property Developments” earlier within thisMD&A for further discussion on recent developments regarding properties covered by certain of our stream and royalty interests. Cost of sales decreased to $20.4 million for the three months ended September 30, 2017 from $22.7 million for the three monthsended September 30, 2016. The decrease was primarily due to decreased gold sales from Andacollo and Mount Milligan. Cost ofsales is specific to our stream agreements and is the result of RGLD Gold’s purchase of gold, silver and copper for a cashpayment. The cash payment for gold from Mount Milligan is the lesser of $435 per ounce or the prevailing market price of goldwhen purchased, while the cash payment for our other streams is a set contractual percentage of the gold, silver or copper (MountMilligan) spot price near the date of metal delivery. General and administrative expenses decreased to $6.9 million for the three months ended September 30, 2017 from $10.5 millionfor the three months ended September 30, 2016. The decrease during the current quarter was primarily due to a decrease in non-cash stock based compensation expense and legal costs of approximately $1.8 million and $1.1 million, respectively. During the three months ended September 30, 2017, we recognized income tax expense totaling $7.5 million compared with anincome tax expense of $7.2 million during the three months ended September 30, 2016. This resulted in an effective tax rate of22.1% in the current period, compared with 21.1% in the quarter ended September 30, 2016. The increase in the effective tax ratefor the three months ended September 30, 2017 is primarily attributable to the re-measurement of Canadian dollar deferred taxliabilities to US dollars due to changes in the Canadian dollar to US dollar exchange rate. Liquidity and Capital Resources Overview At September 30, 2017, we had current assets of $155.8 million compared to current liabilities of $39.7 million resulting inworking capital of $116.1 million and a current ratio of 4 to 1. This compares to current assets of $143.6 million and currentliabilities of $34.3 million at June 30, 2017, resulting in working capital of $109.3 million and a current ratio of approximately 4to 1. During the quarter ended September 30, 2017, liquidity needs were met from $92.1 million in net revenue and our available cashresources. During the three months ended September 30, 2017, the Company repaid $50.0 million of the outstanding borrowingsunder the revolving credit facility. As of September 30, 2017, the Company had $800 million available and $200 millionoutstanding under its revolving credit facility. Working capital, combined with the Company’s undrawn
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revolving credit facility, resulted in approximately $916 million of total available liquidity as of September 30, 2017. TheCompany was in compliance with each financial covenant under the revolving credit facility as of September 30, 2017. Refer toNote 3 of our notes to consolidated financial statements for further discussion on our debt. We believe that our current financial resources and funds generated from operations will be adequate to cover anticipatedexpenditures for debt service, general and administrative expense costs and capital expenditures for the foreseeable future. Ourcurrent financial resources are also available to fund dividends and for acquisitions of stream and royalty interests. Our long-termcapital requirements are primarily affected by our ongoing acquisition activities. The Company currently, and generally at anytime, has acquisition opportunities in various stages of active review. In the event of one or more substantial stream and royaltyinterest or other acquisitions, we may seek additional debt or equity financing as necessary. Please refer to our risk factors included in Part 1, Item 1A of our Fiscal 2017 10-K and in Part II, Item 1A of this Quarterly Reporton Form 10-Q for a discussion of certain risks that may impact the Company’s liquidity and capital resources. Summary of Cash Flows Operating Activities Net cash provided by operating activities totaled $71.6 million for the three months ended September 30, 2017, compared to$55.1 million for the three months ended September 30, 2016. The increase was primarily due to a decrease in income taxes paidof approximately $14.7 million and an increase in proceeds received from our stream and royalty interests, net of production taxesand cost of sales, of approximately $3.9 million. Investing Activities Net cash provided by investing activities totaled $0.1 million for the three months ended September 30, 2017, compared to cashused in investing activities of $90.3 million for the three months ended September 30, 2016. The decrease in cash used ininvesting activities is primarily due to a decrease in acquisitions of stream and royalty interests in mineral properties compared tothe prior year period. Financing Activities Net cash used in financing activities totaled $69.2 million for the three months ended September 30, 2017, compared to cashprovided by financing activities of $51.6 million for the three months ended September 30, 2016. The decrease in cash providedby financing activities is primarily due to the Company’s $70 million borrowing under its revolving credit facility to fund aroyalty acquisition during the prior year quarter. During the three months ended September 30, 2017, the Company repaid $50.0million of the outstanding borrowings under the revolving credit facility. Recently Issued or Adopted Accounting Standards and Critical Accounting Policies Refer to Note 1 of our notes to consolidated financial statements for further discussion on any recently issued or adoptedaccounting standards. Refer to our Fiscal 2017 10-K for discussion on our critical accounting policies. Forward-Looking Statements Cautionary “Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995: With the exception of historicalmatters, the matters discussed in this Quarterly Report on Form 10-Q are forward-looking statements that involve risks anduncertainties that could cause actual results to differ materially from projections or estimates contained herein. Such forward-looking statements include, without limitation, statements regarding projected production estimates and estimates pertaining totiming and commencement of production from the operators of properties where we hold stream and royalty interests; statementsrelated to ongoing developments and expected developments at properties where we hold stream and royalty interests; effectivetax rate estimates; the adequacy of financial resources and funds to cover anticipated expenditures for debt service and generaland administrative expenses as well as costs associated with exploration and business development and capital expenditures,expected delivery dates of gold, silver, copper and other metals, and our expectation that substantially all our revenues will bederived from stream and royalty interests. Words such as “may,” “could,” “should,” “would,” “believe,” “estimate,” “expect,”“anticipate,” “plan,” “forecast,” “potential,” “intend,” “continue,” “project” and variations of these words, comparable words andsimilar expressions generally indicate forward-
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looking statements, which speak only as of the date the statement is made. Do not unduly rely on forward-looking statements.Actual results may differ materially from those expressed or implied by these forward-looking statements. Factors that couldcause actual results to differ materially from these forward-looking statements include, among others:
· a low price environment for gold and other metal prices on which our stream and royalty interests are paid or a low priceenvironment for the primary metals mined at properties where we hold stream and royalty interests;
· the production at or performance of properties where we hold stream and royalty interests, and variation of actual
performance from the production estimates and forecasts made by the operators of these properties; · the ability of operators to bring projects, particularly development stage properties, into production on schedule or
operate in accordance with feasibility studies; · acquisition and maintenance of permits and authorizations, completion of construction and commencement and
continuation of production at the properties where we hold stream and royalty interests; · challenges to mining, processing and related permits and licenses, or to applications for permits and licenses, by or on
behalf of indigenous populations, non-governmental organizations or other third parties; · liquidity or other problems our operators may encounter, including shortfalls in the financing required to complete
construction and bring a mine into production; · decisions and activities of the operators of properties where we hold stream and royalty interests; · hazards and risks at the properties where we hold stream and royalty interests that are normally associated with
developing and mining properties, including unanticipated grade, continuity and geological, metallurgical, processing orother problems, mine operating and ore processing facility problems, pit wall or tailings dam failures, industrialaccidents, environmental hazards and natural catastrophes such as floods or earthquakes and access to raw materials,water and power;
· changes in operators’ mining, processing and treatment techniques, which may change the production of minerals
subject to our stream and royalty interests; · changes in the methodology employed by our operators to calculate our stream and royalty interests in accordance with
the agreements that govern them; · changes in project parameters as plans of the operators of properties where we hold stream and royalty interests are
refined; · accuracy of and decreases in estimates of reserves and mineralization by the operators of properties where we hold
stream and royalty interests; · contests to our stream and royalty interests and title and other defects to the properties where we hold stream and royalty
interests; · adverse effects on market demand for commodities, the availability of financing, and other effects from adverse
economic and market conditions; · future financial needs of the Company and the operators of properties where we hold stream or royalty interests; · federal, state and foreign legislation governing us or the operators of properties where we hold stream and royalty
interests; · the availability of stream and royalty interests for acquisition or other acquisition opportunities and the availability of
debt or equity financing necessary to complete such acquisitions; · our ability to make accurate assumptions regarding the valuation, timing and amount of revenue to be derived from our
stream and royalty interests when evaluating acquisitions;
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· risks associated with conducting business in foreign countries, including application of foreign laws to contract and otherdisputes, validity of security interests, governmental consents for granting interests in exploration and exploitationlicenses, application and enforcement of real estate, mineral tenure, contract, safety, environmental and permitting laws,currency fluctuations, expropriation of property, repatriation of earnings, taxation, price controls, inflation, import andexport regulations, community unrest and labor disputes, endemic health issues, corruption, enforcement and uncertainpolitical and economic environments;
· changes in laws governing us, the properties where we hold stream and royalty interests or the operators of such
properties; · risks associated with issuances of additional common stock or incurrence of indebtedness in connection with acquisitions
or otherwise including risks associated with the issuance and conversion of convertible notes; · changes in management and key employees; and · failure to complete future acquisitions;
as well as other factors described elsewhere in this report and our other reports filed with the SEC, including our Fiscal 2017 10-K. Most of these factors are beyond our ability to predict or control. Future events and actual results could differ materially fromthose set forth in, contemplated by or underlying the forward-looking statements. Forward-looking statements speak only as ofthe date on which they are made. We disclaim any obligation to update any forward-looking statements made herein, except asrequired by law. Readers are cautioned not to put undue reliance on forward-looking statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our earnings and cash flows are significantly impacted by changes in the market price of gold and other metals. Gold, silver,copper, nickel and other metal prices can fluctuate significantly and are affected by numerous factors, such as demand, productionlevels, economic policies of central banks, producer hedging, world political and economic events and the strength of the U.S.dollar relative to other currencies. Please see “ Volatility in gold, silver, copper, nickel and other metal prices may have anadverse impact on the value of our stream and royalty interests and may reduce our revenues. Certain contracts governing ourroyalty stream interests have features that may amplify the negative effects of a drop in metals prices, ” under Part I, Item 1A ofour Fiscal 2017 10-K, for more information that can affect gold, silver, copper and other metal prices as well as historical gold,silver, copper and nickel prices. During the three month period ended September 30, 2017, we reported revenue of $112.5 million, with an average gold price forthe period of $1,278 per ounce, an average silver price of $16.84 per ounce and an average copper price of $2.88 per pound. Approximately 77% of our total reported revenues for the three months ended September 30, 2017 were attributable to gold salesfrom our gold producing stream and royalty interests, as shown within the MD&A. For the three months endedSeptember 30, 2017, if the price of gold had averaged 10% higher or lower per ounce, we would have recorded an increase ordecrease in revenue of approximately $8.9 million. Approximately 10% of our total reported revenues for the three months ended September 30, 2017 were attributable to silver salesfrom our silver producing stream and royalty interests. For the three months ended September 30, 2017, if the price of silver hadaveraged 10% higher or lower per ounce, we would have recorded an increase or decrease in revenue of approximately $1.1million. Approximately 10% of our total reported revenues for the three months ended September 30, 2017 were attributable to coppersales from our copper producing stream and royalty interests. For the three months ended September 30, 2017, if the price ofcopper had averaged 10% higher or lower per pound, we would have recorded an increase or decrease in revenue ofapproximately $1.1 million.
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ITEM 4. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures As of September 30, 2017, the Company’s management, with the participation of the President and Chief Executive Officer (theprincipal executive officer) and Chief Financial Officer and Treasurer (the principal financial and accounting officer) of theCompany, carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls andprocedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “ExchangeAct”)). Based on such evaluation, the Company’s President and Chief Executive Officer and its Chief Financial Officer andTreasurer have concluded that, as of September 30, 2017, the Company’s disclosure controls and procedures were effective toprovide reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under theExchange Act is recorded, processed, summarized and reported within the required time periods and that such information isaccumulated and communicated to the Company’s management, including the President and Chief Executive Officer and theChief Financial Officer and Treasurer, as appropriate to allow timely decisions regarding required disclosure. Disclosure controls and procedures involve human diligence and compliance and are subject to lapses in judgment andbreakdowns resulting from human failures. As a result, a control system, no matter how well conceived and operated, canprovide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a controlsystem must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to theircosts. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that allcontrol issues and instances of fraud, if any, within the Company have been detected. Changes in Internal Controls There has been no change in the Company’s internal control over financial reporting during the three months endedSeptember 30, 2017 that has materially affected, or that is reasonably likely to materially affect, the Company’s internal controlover financial reporting. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Voisey’s Bay Refer to Note 10 of our notes to consolidated financial statements for a discussion of the litigation associated with our Voisey’sBay royalty. ITEM 1A. RISK FACTORS Information regarding risk factors appears in Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition andResults of Operations — Forward-Looking Statements,” and various risks faced by us are also discussed elsewhere in Part I, Item2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report onForm 10-Q. In addition, risk factors are included in Part I, Item 1A of our Fiscal 2017 10-K. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. MINE SAFETY DISCLOSURE Not applicable.
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ITEM 5. OTHER INFORMATION Not applicable. ITEM 6. EXHIBITS Exhibit Number Description 31.1* Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2* Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1‡ Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002. 32.2‡ Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002. 101.INS* XBRL Instance Document.101.SCH* XBRL Taxonomy Extension Schema Document.101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document.101.DEF* XBRL Taxonomy Extension Definition Linkbase Document.101.LAB* XBRL Taxonomy Extension Label Linkbase Document.101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document.
* Filed herewith.‡ Furnished herewith.
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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned thereunto duly authorized. ROYAL GOLD, INC. Date: November 2, 2017 By: / s/ Tony Jensen Tony Jensen President and Chief Executive Officer (Principal Executive Officer) Date: November 2, 2017 By: /s/ Stefan Wenger Stefan Wenger Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)
27
EXHIBIT 31.1
CERTIFICATION I, Tony Jensen, certify that: (1) I have reviewed this Quarterly Report on Form 10-Q of Royal Gold, Inc.; (2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this report;
(3) Based on my knowledge, the financial statements, and other financial information included in this report fairly present,
in all material respects, the financial condition, results of operations and cash flows of the registrant as of, and for, theperiods presented in this report;
(4) The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (asdefined in Exchange Act Rules 13a-15(f) and 15d-15(f)), for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities, particularly during the period inwhich this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes in accordance with generallyaccepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the periodcovered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annualreport) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal controlover financial reporting; and
(5) The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or personsperforming the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarizeand report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant’s internal control over financial reporting.
November 2, 2017 /s/Tony Jensen Tony Jensen President and Chief Executive Officer (Principal Executive Officer)
1
EXHIBIT 31.2
CERTIFICATION I, Stefan Wenger, certify that: (1) I have reviewed this Quarterly Report on Form 10-Q of Royal Gold, Inc.; (2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this report;
(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present,
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, theperiods presented in this report;
(4) The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (asdefined in Exchange Act Rules 13a-15(f) and 15d-15(f)), for the registrant and have:
(a) Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities, particularly during the period inwhich this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes in accordance with generallyaccepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the periodcovered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annualreport) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal controlover financial reporting; and
(5) The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or personsperforming the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarizeand report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant’s internal control over financial reporting. November 2, 2017 /s/Stefan Wenger Stefan Wenger Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)
1
EXHIBIT 32.1
EXHIBIT 32.1
CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Royal Gold, Inc. (the “Company”), for the period ended September 30,2017, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Tony Jensen, President andChief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002 that, to my knowledge: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
November 2, 2017 /s/Tony Jensen Tony Jensen President and Chief Executive Officer (Principal Executive Officer)
1
EXHIBIT 32.2
EXHIBIT 32.2
CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Royal Gold, Inc. (the “Company”), for the period ended September 30,2017, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Stefan Wenger, Chief FinancialOfficer and Treasurer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002 that, to my knowledge: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
November 2, 2017 /s/ Stefan Wenger Stefan Wenger Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)
1